Technology: Software licensors must take caution when licensing outside the U.S.

When expanding into international markets, U.S.-based software licensors should always consider whether their software license agreements are enforceable in the countries in which the licensed software is being used. This is critical in order to protect a company’s valuable intellectual property rights. While this may seem like a straightforward issue to address, it can prove challenging when navigating the key differences among the legal frameworks of different countries.

In the first article of this two-part series, we analyzed the importance of a U.S. software supplier's choice of law to govern the license agreement when doing business in the European Union (EU) and, in particular, Germany. Choice of law is only one of myriad legal issues for a U.S. supplier to consider. Using Germany again as an example, this article will outline additional important issues to consider when crafting software license agreements enforceable in the EU. This article will focus on freedom of contract, use of the English language and certain individual country issues.

Freedom of Contract

When drafting a license agreement, it is important to understand whether consumers and businesses in a given country have the general freedom to choose with whom to contract, whether to contract and on which terms to contract.

As a general rule, European courts recognize the “freedom of contract” doctrine, under which contracting parties are generally free to make any commercial agreement. Nevertheless, German law provides that there are certain situations in which this doctrine will not be recognized. These include contracts against public policy, contracts that qualify as “standard terms and conditions” and contracts that are subject to consumer protection laws.

As this relates to software license agreements, mandatory copyright provisions in the EU and in national legislation must also be considered. This includes the right of a licensee to make a single back-up copy of the software; to observe, study, or test the functioning of the program in order to determine the ideas and principles defining the software program; and to reverse-engineer the software under certain conditions.

And there's more. The German rules regarding the use of “standard terms and conditions” will apply to all license agreements if the contractual terms are preprinted for a multitude of user contracts and are not individually negotiated. To be enforceable in a German court, the “standard terms and conditions” must be effectively incorporated into a contract.

If the license agreement qualifies as “standard terms and conditions” under German law, there are stringent minimal requirements for the terms and conditions depending on whether the parties' relationship is a business-to-consumer (B2C) or business-to-business (B2B) licensing scenario. In fact, the requirements are even stricter in the B2C scenario. At a minimum, these requirements impose stricter controls over the terms and conditions of such agreements than would be permitted in individually negotiated license agreements.

Enforceability of English Language

A logical question: Can an English-language license agreement be enforced in a non-English-speaking country as drafted, or would it need to be translated? Assuming both parties have negotiated and signed the agreement, it will generally be enforceable. But of course, there are always exceptions. "Standard terms and conditions" that are written in a different language from the language of the contract, and which are not understandable by a licensor or licensee, are generally not valid. Nevertheless, it is common to draft software license agreements in English, and it is generally considered valid to also use English-language "standard terms and conditions" between commercial licensors and licensees. Such agreements are frequently utsed in Germany without enforceability challenges.

There is recent legal precedent in Germany to support a position that English-language B2B software licenses are enforceable contracts. In the event of a B2C licensing scenario, a company must also consider how the consumer protection laws might apply to an agreement or to English-language terms and conditions in a non-English-speaking country.

Country-Specific Legal Structures

When dealing with a new country, companies should always consider the particular—and potentially significant—differences with U.S. law. For example, one substantial difference between license agreements in Germany and the U.S. (and one which U.S. software licensors and attorneys may not be aware of) is that under German law there is no pure concept of a “license” as a type of contract. For a license agreement to be enforceable, the parties must mutually agree upon the type of contract and the nature of the rights granted in the software. German courts have tried to “fit” license agreements into a specific type of contract depending on what they believe represents the intent of the contracting parties. Under the German Civil Code, a license agreement must fit into one of four types of contracts: a “sales contract,” a “lease contract,” a “works contract” or a “services contract."

To determine a contract “fit,” the contract is analyzed as to whether it is standard (packaged/off-the-shelf) or custom software. Standard software licensed for an indefinite duration and for a one-time payment will be treated as licensed pursuant to a “sales contract” (Kaufvertrag). However, standard software licensed for a specified term will be treated as licensed pursuant to a lease contract (Mietvertrag). Custom software developed for use by the licensee for an indefinite duration will be deemed subject to a works contract (Werkvertrag) or services contract (Bedieunsgvertrag).

So, as practical advice, a lawyer drafting a software license agreement for use in Germany should advise his or her client to expressly identify which of the four types of contracts the parties intend. Furthermore, a lawyer drafting an agreement in a different country should be sure to confirm that the agreement addresses all the necessary local law issues.

Opportunities Abound

Expanding software and technology opportunities in Europe are presenting U.S. software suppliers with abundant prospects for market-share growth. To help ensure expansion with appropriate asset protections, suppliers should consider engaging competent local counsel to assist with the unique aspects of these often complex transactions.